It has become fashionable in media circles to compare the programmatic media market to the high-frequency trading described in Michael Lewis’ “Flash Boys.” The analogies are easy to come by: The open RTB exchange is similar to the New York Stock Exchange and Nasdaq, while private programmatic exchanges resemble Wall Street’s “dark pools.”

It’s a tempting but facile comparison. To be sure, programmatic and open RTB have driven huge efficiencies in media trading, smarter data-centric targeting and better analytics. And the advent of programmatic is a hugely important event in the evolution of media trading. It is the future.

But in our breathless, enthusiastic embrace of programmatic, which is often a source of amusement to those outside media, we need to remember that RTB exchanges are still evolving and currently lack some key characteristics found in financial markets. Chief among these is a clear view into all price and volume information. In other words, they lack true market transparency.

For example, as a buyer with a seat on the open RTB exchange, I don’t know the prices of all of the bid requests that come my way. I only know the prices of the media I buy. If I am a typical demand-side platform, I may see 5 billion bid requests per day in the open exchange, but if I end up buying only 5 million, then I only know the prices of those 5 million. This gives me insight into only 0.1% of the market, which is hardly representative. And the average cost per mille (CPM) my bids clear is often well below the stated maximum CPM I am willing to pay. A market in which this kind of disparity exists is often said to be lacking liquidity.

This is an important observation because broad transparency and liquidity are key components of any efficient market. In their absence, market information will be asymmetric and market participants will focus on the limited pricing information they do have, to the deleterious exclusion of other market data.

Hammering On The Wrong Nail

Broadly speaking, there are three main ways RTB media get priced. First, it’s as a percentage markup over the direct cost of the media. That’s typical of self-serve DSPs, which often command a 10%–15% markup.

The second way is the flat CPM, which has a variable margin built in. This is typical of managed service deals, whether they are with DSPs, networks or trade desks.

Finally, there is the SaaS model, which is a monthly pricing based on a platform’s higher-end features, such as data quality and breadth. There is no markup on media, but it requires monthly minimums. Overall, SaaS models are still rare in practice.

Each approach has its respective merits, but it is the flat CPM model that is often singled out for scrutiny, since it appears to be the least transparent. Indeed, most conversations about RTB “transparency” tend to focus only on CPM margins, as if by overemphasizing the point one might hope to elevate the issue into the sphere of business ethics, when really it’s just an old-fashioned conversation about price.

A disciplined marketer knows that a true overall picture of media effectiveness requires many data inputs, of which CPM is just one. Paid media should always try to attain maximum performance, against well-defined campaign goals, at maximum efficiencies. When that happens, the question of CPM margins is moot. When it doesn’t, then it becomes a question of price, not margin. This is how most mature businesses work.

Asymmetric Information And The Emergence Of ‘Bright Pools’

As a buyer on the open RTB exchange, if I am unable to see any pricing data whatsoever prior to executing a trade, then the market isn’t truly open to me. It is partly obscured and the result is information asymmetry – publishers and SSPs see all price data, while buyers see relatively little.

In this context, private exchanges emerge as an attractive alternative. Prices are negotiated beforehand, as well as other data desired by the buyer. Information parity is restored. To call them “dark pools” is a misnomer. Transparency exists inside them, and the fact that pricing information does not pass from private exchanges into the open exchange is negligible, since the latter do not possess full price transparency in the first place, as we have seen.

Achieving this parity in the open RTB market is important and will require that both sellers and buyers are economically motivated to participate.

5 Comments

What do you mean when you say "open RTB exchange"? I feel like you're confusing terms here (or at the very least confusing me... and I've been in RTB for 3 years). If you have to sign a contract to get a seat (which I believe all exchanges require) how are they open? or are you referring to the OpenRTB standard?

Some exchanges offer inventory discovery tools (Rubicon, Google, AppNexus) that let you forecast the price and audience/targeting. Doing this across multiple exchanges, which I guess is what you're suggesting, would definitely be nice but how realistic is such a thing? How many exchanges do you think will agree to this type of data transparency?

1) the "open exchange" in which anyone with a seat -- i.e. anyone who's signed a contract with the SSP and has written bidders to the API endpoints of that exchange -- can buy advertising from that SSP's publisher partners. It is "open" in the sense of not requiring publisher pre-approval to participate. It is separate and distinct from a "closed" or "private" exchange in which all of the participants, advertisers and pubs alike, are specified from the outset. Also called "programmatic direct", this is no longer RTB, since RTB's auction model does not pertain here -- CPMs are generally agreed to in advance.

2) the openRTB spec as defined by the IAB. Specifically, that document's description of what data can, and cannot be passed in a bid request object. The IAB’s OpenRTB Specification version 2.2 (published 4/2014) lists all the objects that can be defined in a Bid Request from an SSP / publisher (including Geo, Creative, Content, etc.), of which Price is not one. It is not until the bidding party has won the auction that the clearing price is communicated back to them via a Bid Response object.

To your later point -- inventory discovery tools are fantastic, but they tend to forecast inventory, not price, given a certain set of targeting parameters. Price guidance that simply states "your bid should be higher" as a tactic for hitting a campaign goal against a target audience is not the same as general price transparency.

To your last point -- "I can see clearing prices for requests I was eligible for" means that impressions I tried to buy, but failed. This is useful for improving the bid/win ratios, but again is still only going to be a tiny % of total bid request, and therefore again not the same thing as general price transparency.

I understand what you mean by open now and completely agree. I just think that this article (and the title in particular) are a little too ambiguous since you don't actually mention OpenRTB (the standard, which I'm part of btw).

As for clearing prices, no, you don't actually have to buy and fail to see the price. If you're eligible, meaning your bidder gets the callout (you may respond with a no-bid) you can still see the price. So it's not a tiny % if you have the capacity to digest the fire hose.

However, this is how it's done on Google's AdX, so to get true transparency cross-exchange, you'd need every exchange to have a similar setup and a governing body that can digest the fire hose of all these bids which I suspect is closer to fiction.

Josh,
Great piece. As the CEO of AdFin (a role I recently took on), I may be bit biased, but this is exactly our vision...to "bring the Bloomberg terminal" to RTB. We're on a mission to bring pricing intelligence to programmatic in the same way financial trading platforms brought it to investing. As you clearly point out, transparency and liquidity are key components of any efficient market...without it, the expansive programmatic market we all envision will struggle to live up to its potential. Look forward to continuing the conversation.

A simple way I've described this is like eBay in a simple auction; you don't know what the final price will be and you don't know if you will win. Vs the "Buy Now" price which is a guaranteed win. Both are effective for what that the buyer and seller are trying to accomplish.